We have for some time argued that traditional equity income funds are too heavily dependent on a narrow range of stocks, and that the stocks themselves are perhaps looking overstretched in terms of the dividends they pay compared to their underlying earnings.
In November last year we published research showing that 25.1% of the capital in the AIC UK Equity Income sector is invested in just ten stocks, and across those companies the average dividend cover is 1.17x. We found that open ended funds are even more heavily concentrated, with just under 30% of assets invested in ten stocks, among which the average dividend cover is just 1.04%.
The mood amongst investors seems to be changing as awareness of this concentration grows, not least because of articles like this one in the Times warning of a ‘squeeze’ ahead for investors and, where once UK Equity Income was regularly the top selling Investment Association sector, outflows have been building steadily for some months. In fact the IA UK Equity Income sector saw bigger retail outflows in January this year than any other bar the Specialist sector.
Even after recent outflows, however, the sector remains one of the largest overall with assets of more than £62bn under management – accounting for roughly ten percent of all assets invested in open ended funds. Among investment trusts, assets amounting to £10bn are held in UK Equity Income trusts.
Income still commands a strong pull, and anecdotally trusts which pay a higher income tend to trade at narrower discounts or higher premiums to NAV. In this article, we look across the sectors for trusts which have dividend yields above that of the FTSE All Share, yet trade at a meaningful discount to NAV.
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